Many multi-owner businesses have a buy-sell agreement in place. It may have been drafted years ago, reviewed by everyone at the table, signed, and filed away. Ask many owners what it actually says today, and the honest answer is often “I would have to check.”
A buy-sell agreement is not written to matter on a normal business day; rather, it is designed to address certain events that can place a business under significant stress (for example, an owner’s death, a disability, a divorce, or a dispute that ends a partnership). It is the plan meant to remove uncertainty when uncertainty is most expensive. An agreement that has not been revisited in years may not do that job anymore, even though nothing about the document itself has changed.
The Number That Was Right Once
Many agreements set a valuation approach at signing: a formula tied to earnings, a fixed price the owners agreed on, or a method that seemed fair given what the business looked like at the time. That number was likely reasonable in the year it was written. Businesses rarely stay still. Revenue grows, the ownership mix shifts, new lines of business get added or dropped, and a formula that made sense at signing may no longer reflect the business’s current value.
The risk is not abstract. An outdated valuation formula can significantly undervalue a departing owner’s interest, or it can set a purchase price the remaining owners and the business genuinely cannot afford to pay when the moment arrives. Either outcome tends to surface at the worst possible time rather than during a calm year when it would have been easy to fix.
A Plan on Paper Is Not The Same As A Plan That Is Funded
The agreement describes what is supposed to happen. It does not guarantee the money to make it happen will actually be available. How a buyout gets funded, whether that is through life insurance, a note held by the business, or another structure entirely, is a separate question from the legal terms of the agreement itself. A well-written agreement paired with no funding plan can leave remaining owners scrambling to come up with cash they do not have, at the exact moment they can least afford the distraction.
Ownership Does Not Stay Still Either
The ownership group named in a buy-sell agreement may look different years later. Partners join. Minority stakes change hands. Family members inherit interests they never expected to hold. An agreement written for one ownership structure can end up governing a very different one by the time it’s actually triggered, and a triggering event involving an owner the document was not really built around tends to surface complications nobody anticipated when it was signed.
Why This May Not Get Caught Early
None of this happens because someone did something wrong. The agreement may have been appropriate for the business as it existed at the time. The business simply kept moving, and legal agreements do not update themselves. A buy-sell agreement is easy to treat as a one-time task when it is actually closer to something that deserves a periodic look alongside the rest of a business’s planning, the same way insurance coverage or an estate plan does.
The Real Question
An agreement that has not been revisited in several years is not necessarily broken. But it also has not been tested against the business as it exists now. The value in reviewing it is evaluating whether the plan already in place is still positioned to function as intended when it is needed, rather than finding out otherwise in the middle of the issue it was intended to solve.
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